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The Tax Code In 2014 -- It Still Stinks

Many taxpayers will have to get used to new taxes in 2014 as they complete their income tax returns for 2013. Here are my three favorites (and I am being totally sarcastic): PEP, Pease and the NII tax. Why do I loathe them? Because they’re stealth taxes; they are sneaky and cynical and a perfect illustration of the contempt our politicians have for the tax code and taxpayers – which is why the tax code is rotting, and why they don’t do a thing to address that.

(Photo credit: 401(K) 2013)

PEP and Pease have returned from the dustbin of history, where they should have stayed. Introduced more than 20 years ago, they went away as part of the Bush tax cuts in 2001 and were resurrected in the fiscal cliff debacle because our federal government doesn’t know how to do a budget anymore. The NII tax is a result of Obamacare, and yet another example of what a mess that legislation really is (I’m still trying to figure out why we had to pass it to find out what was in it).

PEP stands for “personal exemption phaseout.” It limits a mechanism in the tax code that was designed to make things fairer for families. But for 2013 and years after, it phases that out for certain income levels until it disappears. The worksheet used to figure it out should come with aspirin.

Pease is named for Donald J. Pease, a lawmaker from Ohio who gets credit for nothing more than a pocket-picking technique. Pease caps itemized deductions for certain taxpayers – perfectly legitimate itemized deductions. If we want to increase tax revenue, why don’t we raise the marginal rates – and in a transparent way? To be fair, even the great Tax Reform Act of 1986 had a hidden marginal rate.

The NII tax is new for 2013 and applies to individuals, estates, and trusts. It is a 3.8 percent tax on, yes, income from investments. And that’s where the fun begins. What’s investment income? The draft instructions to fill out the form for this disaster are 20 pages long. The main drafters of the regulations, which supposedly help govern this new tax — and they are really good tax lawyers — will tell you, “We did our best.” Not a ringing endorsement of the underlying tax policy sense here. If the NII tax applies to you, you and your tax adviser will have a ball.

And that raises another question. Do any of these three taxes apply to you? Here’s where the cynicism comes in. The politicians will tell you these taxes only hit “the rich.” And the government decides who is the rich, except the government can’t quite seem to make up its mind who’s rich. These things all have different income thresholds. I mean, it’s brilliant tax policy.

I’ve always believed in progressive income taxation. This isn’t it. The conservatives have sold us on the notion that tax is a dirty word, and the liberals have sold us on the notion that class envy is a healthy state of mind.

And that, folks, is why the tax code stinks. And it won’t get any better in the new year.

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